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FIN 353 Quiz 2

FIN 353 Quiz 2

Version B

The one-year interest rate over the next three years is expected to be 3%, 4%, 12%. The liquidity premium for one- to three-year bonds: 0%, 0.25%, 0.75%. What is the interest rate on the three year bond? A. 7.25%

  1. 50%
  2. 08%
  3. 75%

What kind of credit instrument pays a onetime payment of the face value?

  1. Simple Loan B. Coupon Bond
  2. Discount Bond
  3. Fixed Payment Loan

The current one year interest rate is 4% on a T-bill. The current two year interest is 8% on the T-note. What is the market predicting about the interest rate on a one year bond in year 2(one year from now) solely based on the expectations theory?

  1. 12%
  2. 8% C. 10%
  3. 4%

The yield curve is completely flat. Based on the expectations theory what is the market predicting about future interest rates?

  1. Decrease significantly.
  2. Stay constant.
  3. Increase slightly.
  4. Decrease slightly.

There is a financial crisis. What will the Fed do to stimulate economic growth? A. Open market purchase to increase interest rates.

  1. Open market purchase to decrease interest rates.
  2. Open market sale to increase interest rates.
  3. Open market sale to decrease interest rates.

Currently, the discount rate is 4% and the federal funds rate is 2%. The Fed changes the discount rate to 3%. How will the supply curve change? How has the federal funds rate changed?

  1. The horizontal section of the supply curve will shift down and the federal funds rate will increase to 2.5%.
  2. The vertical section of the supply curve will shift to the right and the federal funds rate will stay at 3%.
  3. The horizontal section of the supply curve will shift down and the federal funds rate will stay at 2%.
  4. The vertical section of the supply curve will shift to the right and the federal funds rate will fall to 1%.

How does an increase in stock volatility affect interest rates? A. Stocks have nothing to do with interest rates.

  1. Bonds are relatively less risky compared to stocks, increasing bond demand thereby decreasing interest rates.
  2. Bonds are relatively less risky compared to stocks, increasing bond demand thereby increasing interest rates.

In which situation would you prefer to be a borrower?

  1. The interest rate is 29% and expected inflation is 27%.
  2. The interest rate is 7% and expected inflation is 7%.
  3. The interest rate is 60% and expected inflation is 35%.
  4. The interest rate is 10% and expected inflation is 12%.

Debt issued by Southeastern Corporation has a yield of 10% and coupon of 11%. A municipal bond of equal risk currently has a yield and coupon of 6%. Your marginal tax bracket is 35%. Which investment is a better buy? A. Corporate bond

  1. Municipal bond
  2. None, they have the same yield

When there occurs an economic recession, the supply curve shifts to the _________, the demand curve shifts to the ________, and the demand curves moves __________ than the supply curve. A. left, left, more.

right, right, more.

left, left, less.

right, right, less.

A 10-year, 7% coupon bond with a face value of $1,000 is currently selling for $900. Compute your rate of return if you sell the bond next year for $890.

  1. 6%
  2. 4%
  3. 4%
  4. 2%

A decrease in the expected rate of inflation will ________ demand for bonds, ________supply for bonds, and ______ the interest rate.

  1. decrease, decrease, decrease
  2. increase, decrease, increase
  3. decrease, increase, increase
  4. increase, decrease, decrease

What does the difference between the yield on Treasury bonds and corporate bonds signify? A. default risk.

  1. liquidity risk.
  2. Both A and B.
  3. None of the above.

You expect interest rates to decrease in the future. Would you rather be a holder of long-term or short-term bonds?

  1. Short-term bonds since prices will increase more when interest rates decrease.
  2. Long-term bonds since prices will increase more when interest rates decrease.
  3. Short-term bonds since prices will fall more when interest rates decrease. D. Long-term bonds since prices will fall more when interest rates decrease.

There is an economic boom that increases profitability of corporations. The demand for corporate bonds has _______, the demand for Treasury bonds has _______, and the spread has _________.

  1. decreased, increased, narrowed
  2. increased, decreased, narrowed
  3. decreased, increased, widened
  4. increased, decreased, widened

Which factors determine the supply for an asset? A. government activities.

  1. expected inflation.
  2. A and B.
  3. All of the Above.

If you expect the inflation rate to be 4 percent over the next year and a one-year bond has a coupon rate of 8% and a yield to maturity of 7%, then the real interest rate on this bond is? A. 4%.

  1. 3%.
  2. -4%.
  3. -3%.

The yield to maturity on a 1 year discount bond with a $1,000 face value and $960 price is? A. 4.00%.

  1. 17%.
  2. 5%.
  3. 26%.

The coupon on a 10 year corporate bond is 12%. The yield to maturity on the same bond is 14%. Is this bond trading at a discount or a premium?

  1. Discount
  2. Premium
  3. Which of the following Fed objectives conflict? A. Price stability, lender of last resort.
  4. Economic growth, high employment.
  5. High employment, lender of last resort.
  6. Price stability, high employment.

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